Homework Assignment on Monopolistic Competition 1

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Homework Assignment on Monopolistic Competition 1. Based upon the table below, answer the following questions. Provide complete explanations. a. What output level will the firm produce in order to maximize profits or minimize loss? The firm will have an output level of 40 because the marginal revenue and marginal cost are equal. b. What price will the firm charge? The firm will charge $16 for each unit because it is the highest price they can charge while till making profit. c. What is the level of per unit profits? The firm will receive $540 for every 30 units sold. d. What is the level of economic profit? The economic profit is $1.50 because the price is that much higher than the ATC. e. What will happen to firm’s economic profit in the long run? Without any barriers to entry, this firm would not have any economic profit in the long term as the short term profits attracts other firms to enter. Price $23 $20 $18 $16 $14 $12 Quantity Total Marginal Total Revenue Revenue Cost 10 20 30 40 50 60 $230 $400 $540 $640 $700 $720 -$17 $14 $10 $6 $2 $340 $400 $480 $580 $700 $840 Marginal Average Cost Total Cost -$34 $6 $20 $8 $16 $10 $14.50 $12 $14 $14 $14 2. Esma’s Day Spa began to offer a relaxing aromatherapy Treatment. You are the firm’s economic advisor. Esma asks you how much to produce and what price to charge in order to maximize profits. Based upon information in the table on the next slide, answers the questions below. Please provide complete explanations. a. For each level of output, calculate total revenue, marginal revenue, average total cost, and marginal cost. Complete the cost and revenue table below. b. What is the profit-maximizing level of output for the treatments? The profit maximizing level of output would be 40 units of output. The marginal revenue and marginal cost are not quite equal, but they are the closest option. c. What is the profit-maximizing price the firm should charge? The profit maximizing price is $22 per units. d. Is the firm earning economic profits or losses? e. What is the size of the firm’s economic profits or losses? f. What will happen in the long run? The demand curve for the treatments is given by the first two columns in the table below (remember, demand shows us the relationship between price and quantity). The firm’s total costs are given in the third column. Price Quantity Total Marginal Total Marginal Average Revenue Revenue Cost Cost Total Cost $24.00 10 $240 $23.00 20 $460 $22 $435 $16 $21.75 $22.50 30 $675 $21.5 $610 $17.5 $20.33 $22.00 40 $880 $800 $19 $20 $21.60 50 $1,080 $20.5 $20 $1,005 $20.5 $20.1 - $275 - $27.5 $21.20 60 $1,272 $19.2 $1,225 $22 $20.42 3. Compare the long run outcomes of a perfectly competitive firm with a monopolistically competitive firm. OPTIONAL HOMEWORK ASSIGNMENT – MONOPOLY 1. If the monopolist is earning short run economic profits, what will happen in the long run? 2. Is a monopolist forced to produce at an output level which is economically efficient in the long run? Explain carefully. 3. What are the costs to society of having production take place in a monopoly market structure? What are some of the potential benefits to society of having production take place in a monopoly market structure? 4. Assume a pure monopolist and perfectly competitive firm face the same cost structure. Compare the long run results with respect to: a. price b. output c. profits d. allocation of resources e. technical efficiency f. advertising g. income distribution.